PBA complains to govt over Rs1 billion in 'unfair' tax relief granted to ARY

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ISLAMABAD: The Pakistan Broadcasters Association (PBA) has written to the government to draw its attention to possible favouritism shown to ARY in a Rs1 billion fraud case that the government had identified in 2013.

An exemption certificate on airtime/content — believed by the Federal Board of Revenue (FBR) to be worth hundreds of millions of rupees — has opened a Pandora’s box after the PBA wrote to the government to complain that if such an incentive was provided to ARY, other media houses should be given similar tax breaks and that billions of rupees in taxes paid since 2013 should be adjusted against their future liabilities.

The letter has been addressed to Adviser to the PM on Finance and Revenue Dr Hafeez Shaikh and acting Chairman FBR Nausheen Javaid Amjad.

Hoodwinking the authorities?

Earlier, the FBR had served a notice to ARY Communications Limited (ARY) with a tax demand of Rs992 million.

The FBR had alleged that ARY evaded tens of millions in taxes through misrepresentation, concealment and misuse of tax exemptions, causing a substantial loss to the national exchequer.

Read more: FBR serves Rs992m notice to private TV channel in alleged tax evasion case

An FBR investigation had found that an offshore company, ARY FZLLC,  undertook transactions with two other companies, ARY COMM and ARY Films and TV Productions Pvt, which, by virtue of Section 85 of the Income Tax Ordinance, 2001, were its associates.

As per the investigation, the tripartite agreement was utilised to allow the three companies to settle their receivables and payables in Pakistan on behalf of ARY FZLLC and avoid taxes in the process.

The investigation further stated that the taxpayer company, in the garb of exempted payments, also remitted payments against the cost of production and services, which were added under a single cost of “transmission costs” without deduction of relevant tax as is required under Pakistani law.

The FBR was of the view that the media house had claimed incorrect exemptions and that the amount was liable to be taxed in Pakistan.

ARY Communications, in its defence, stated that the FBR had not made correct cost comparisons and unfairly compared ARY with other media companies, further stating that its costs are not inflated even if the costs are to a related party. It stated that it had a different business model compared to the other companies.

As the exchange between the media house and FBR continued, the FBR claims that ARY Communications, in an effort to justify the costs it included in the tax exempted head, tampered with the wording of an agreement it had previously submitted to FBR.

The FBR compared the two documents and pointed out exactly where ARY Communications had changed the language and added words in an attempt to show that the media house had not breached any agreement.

The FBR in its findings noted that “the tampering of the document was done to defeat the issue in the show-cause notice on transfer pricing, whereby comparison will be made in the changed position of comparable by adding words ‘content’ and replacing ‘advertisement & promotional content’, that is by enlarging the scope of content to include other costs. Therefore, the tampering has been done to mislead the department to take advantage of this effect that the taxpayer case was different from the case of comparable companies confronted in the show cause.”

ARY FZLLC allegedly tampered with the documents as it obtained withholding tax exemptions of 12 to 15% by submitting an agreement that indicated only airtime charges, but when FBR objected to highly unjustified value of airtime, the group allegedly submitted tampered agreement with the addition of word “content” to “airtime”.

The cost of content was not part of the airtime agreement and was not recorded in ARY Communications, as it was shown as an export of ARY Films and TV Production. The Withholding Tax exemption is not available to associates as per law, but this fact was allegedly concealed from the FBR but later on indicated by the auditor in the accounts.

The FBR, to state its case, also provided comparisons of airtime/ transmission costs of other companies in the industry, and concluded that ARY had overvalued its “airtime”. 

ARY COMM in initial years also disclosed airtime charges in accounts, then changed its name to ‘transmission charges’. 

ARY Production produced and exported all content to ARY FZLLC, an offshore based in Dubai, at zero tax under the exemption as per the second schedule of Income Tax Ordinance under Clause 114.

PBA wants similar treatment

Now the PBA, in its letter written to the government, has stated that it is closely watching how this case unfolds and how the department handles this case after it has rightly taken cognizance of ARY’s illegal use of the subject exemption — because if the authorities are facilitating ARY by delaying adjudication of the proceedings, or if the department intends to allow ARY to continue to claim exemptions in the manner in which they are currently being claimed, then PBA's members should also be granted similar treatment so that they too are allowed to claim an exemption on all payments made to companies abroad in relation to the sale and purchase of airtime/content.

Our members, the PBA said, would like the same relief if it is legal and they too should be allowed to avoid sales tax by declaring their Pakistan-made dramas for Pakistan to be considered “exports” to their own Dubai affiliated companies and then have it sold back to Pakistan and avoid both sales tax and withholding tax.

Sources close to ARY denied these charges and said the case was pending in court so they did not want to say anything on record other than a press release issued by the company. 

ARY claims it did not apply any pressure on PM Office or the Finance Ministry to help manage its tax liability. A meeting with the ARY senior leadership and FBR, coordinated by people in PM House, was about how to increase the tax base in the country, a source claimed.

The source, however, said that after the meeting, the FBR’s Commissioner Appeals had set aside the order of the additional commissioner Inland Revenue in the case of the alleged tax evasion of Rs992 million against ARY Communication.

The Commissioner Appeals pointed out 'contradictions' at different points of the order and ordered starting the investigation afresh. At the same time, the investigating officer of the case was also changed and the ARY case was transferred from a Large Taxpayer Unit to a Corporate Taxpayer Unit. 

Tax analysts have pointed out that such a move is mysterious.

Originally published in The News